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BUDGET 2017: Tax-free dividend allowance to be cut to £2,000

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Written by: Paloma Kubiak
08/03/2017
The tax-free dividend allowance will be cut from £5,000 to £2,000 from April 2018, the chancellor announced in his Budget speech today.

The measure will affect employees and directors of small businesses who might remunerate themselves partly or wholly through dividends rather than salary.

It could also hurt investors with dividend generating shares and funds held outside of ISAs and pensions.

The government estimates around 2.27 million individuals will be affected with an average loss of £315.

Hammond said: “The dividend allowance has increased the tax advantage of incorporation. It allows each director/shareholder to take £5,000 of dividends out of their company tax free, over and above the personal allowance. It is also an extremely generous tax break for investors with substantial share portfolios.

“I have decided, therefore, to address the unfairness around director/shareholders’ tax advantage, and at the same time raise some much needed-revenue to fund the measures I shall announce today, by reducing the tax-free dividend allowance from £5,000 to £2,000 with effect from April 2018.”

Any dividend income above the £5,000 allowance is taxed at the following rates:

    • Basic rate taxpayer – 7.5%
    • Higher rate taxpayer – 32.5%
    • Additional rate taxpayers and trustees – 38.1%.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “The Chancellor has taken an axe to the dividend allowance, which amply demonstrates why investors should make the most of their ISA and pension allowances, to protect as much of their wealth as possible from the taxman. Even when the government appears to relax its tax rules, its policies can turn on a sixpence, and end up costing you an awful lot of money if you’ve been complacent about using your tax shelters in the meantime.

“The good news is that with the new higher ISA allowance, investors can actually offset a lot of the £3,000 reduction to the allowance. By using up their ISA allowance between now and 2018, investors can keep £55,240 out of the clutches of the taxman, which would mean £2,210 of dividends sheltered from tax on a typical income portfolio yielding 4%.”

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